Friday, February 10, 2017

Tragedies and impossibilities in economics

One of the reasons economics is called the dismal science is perhaps its pessimism concerning the possibility of fixing social problems. Welfare economics postulates the existence of a number of market failures in which the free interaction of individuals does not deliver an efficient outcome. Two examples are the presence of collective goods and externalities. In the presence of collective goods (goods that are non-rival and non-excludable) individuals are unable to overcome the "free-rider problem," and they need some costly external authority to help them solve the problem. Mancur Olson suggests that only those that have high stakes will be able to organize themselves and contribute to collective action. In the presence of goods that are non-excludable but rival (commons), then we face Hardin's "tragedy of the commons," because individual agents do not take into account the negative externality that their comsumption imposes on others. Again, only concentrating the property rights in one agent (a kind of dictatorial solution) or delegating the solution of the problem to an external authority, will the problem be mitigated. But if this external authority has to be democratic, then we are confronted with Arrow's Impossibility Theorem, which argues that democracy in the form of majority rule voting is incompatible with some mild conditions of consistency that we would like to impose on social decisions (the alternative is again a dictator, something Arrow would not recommend, being a very reasonable progressive economist). James Buchanan and the authors of the "public choice" critique argue that we cannot expect much from public servants, because they will be as self-interested as consumers. Our hope is that there is an army of economists and social scientists that take these results as motivation to try to find conditions under which they can be overturned. Putterman and other experimentalists show us in their work that humans are not always unable to overcome the free-rider problem, and are even able through their social norms or intrinsic preferences to spend time and resources to monitor the political system and make it work reasonably well (well, not always). Sen reminds us that Arrow's impossibility can be overcome through reasoned dialogue and additional information beyond preference rankings. And Ostrom devoted all her career to show that many communities do overcome the tragedy of the commons without external impositions, although some smart governmental help may be useful.